One of the things
that makes the lives of financial planners so difficult is that we usually have
to get people to do what they
don’t want to do, so that they can get what they want. In other businesses and
professions, you’re generally either providing a good or service that will
provide some immediate pleasure or alleviate some immediate pain. Financial
planning is more like dieting and exercise. Almost all the pain (saving money,
taking a little more investment risk, diversifying out of your favorite stock,
or taking the time to draft boring estate planning documents) is upfront for a
gain (being debt free, having enough money to retire, or making sure your
family is taken care of in case something happens to you) that seems so distant
and far away.
Most of us know that financial planning is something that
we need to do, but it’s easy to procrastinate because it’s rarely urgent (and
by then it’s often too late to do much). So how can we overcome the challenge
of our own inertia? I think it begins with finding at least one goal that
really motivates you.
One of the things that has inspired me is a blog called earlyretirementextreme.com, which shares stories and tips
from people who were able to retire in their early 30s, not through get rich
quick schemes, but by “extreme” saving. The math works out so that if you save
75% of your after-tax income, and earn about 8% a year on those savings for 5
years, you’d have enough to maintain that standard of living indefinitely by
withdrawing a sustainable income of 4% a year from those savings. Imagine being
financially independent 5 years from now and being able to do whatever you’d
like to do for the rest of your life?
I also know this is possible firsthand because I have a
very good friend who will be financially independent, and essentially able to
retire, this year at the ripe old age of 32. He did this without ever earning a
six-figure income or making any noticeable sacrifices (he doesn’t make his own
clothes or go dumpster diving). In fact, you wouldn’t notice much different
about his lifestyle at all.
So why don’t more people do this? Obviously, it’s quite
difficult to live on only 25% of your after-tax income but the blog is full of
more real-life examples of individuals who’ve been able to do just that with
middle-class incomes of $30-70k. The most important thing is changing your
perspective on money and how much you really need to live a happy and
fulfilling life. As an example, I read an article about how many wealthy
technology executives and entrepreneurs live incredibly modest lifestyles.
Warren Buffett, the second richest man in the country, is also notorious for
his frugality. When you really think about it, you may discover that you need a
lot less than our consumer society would lead you to believe.
That all being said, saving the full 75% may not be
realistic for most people, especially if you’re used to a certain standard of
living or have a lot of financial obligations that are hard to get out of. But,
if you could apply just a few of these ideas to your life and save, say 30% of
your income, it could still make quite a big difference, whether your goal is
to pay off debt faster or retire a few years earlier. In the next series of
blog posts I’ll be discussing some of the specific ideas on the site and what
I’ve done in my own life to try to save and invest about 75% of my income.
Does that mean I’m planning to retire in 5 years? Not
necessarily. I enjoy my job and can’t imagine not working at all, even when I’m
well into my golden years. To me, it’s more about the security, freedom, and
peace of mind that comes from not being dependent on anyone else for my
livelihood.
A final point is that the younger you are, the easier,
more necessary, and more beneficial these changes will be. It will be easier
because young people tend to have fewer financial obligations. For example,
recent graduates often just need to maintain the lifestyle they’re already used
to in college (and have enjoyed quite a bit) instead of automatically
increasing their spending to match their higher incomes once they start
working. At the same time, it will be more necessary because younger
generations won’t be able to count as much on government entitlement programs
that are going bankrupt and defined benefit pension plans that are going the
way of the dinosaur. The good news though, is that they will benefit more from
having a longer time for their savings to grow and compound and for them to
enjoy the freedom that comes with financial independence.
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